Building Credit
The Dollar Stretcher
by Gary Foreman
gary@stretcher.com
Dear Dollar Stretcher,
I am a college student looking for a credit card. When I tell my parents this they say, "no, you don't need one". I feel that I am financially responsible and in control of my money. I am not looking to spend money I don't have but merely to build credit. I've read all about college kids in debt, etc. But what about the rest of us that are responsible and ready to start our lives? How do I even get a credit card? And is there any better way to build credit?
David H.
Chicago, IL
David is smart to take an interest in managing his credit. Like most young adults, David is anxious to grow up. And getting your own credit card is part of that process. But he needs to be careful when he begins this journey. There are more than a few perils along the way.
First, he should consider why he needs to 'build credit'. Sure, credit scores are being used for more things these days. It's even possible that David's college checked his score before accepting his application for enrollment. But typically, the only time that you really need good credit is when you want to borrow money.
In fact, he probably won't need to have much of a credit history until he wants to finance a major purchase like furniture, an auto or home. So there's probably no hurry to 'build credit'.
That's not to say that David shouldn't get off to a good start now. One advantage to getting a credit card early is that David can begin to establish a consistent history of responsible use of credit. Of course, the younger David is, the more likely that he'll fall into trouble.
David needs to remember that having a credit card does not necessarily help his credit rating. If he gets a card with a low credit limit and pays his bill in full each month he will begin to improve his credit score.
But, that same credit card could also hurt his credit score. All he has to do is to begin to carry a monthly balance. In fact, if he just has a credit limit that's too high in relation to his income, he will be less attractive to future potential lenders.
Is there another way to build credit? Not really. There are other things that go into his credit score. But most of the information relates to how much credit is available and how dependable the borrower has been. So information on credit cards is a big portion of most young adults' credit rating.
Once a year David should get in the habit of checking his credit report. There will be a small charge unless he's been refused credit.
The three major credit reporting agencies are:Equifax, PO Box 740241, Atlanta GA 30374-0241; 800-685-1111Experian, PO Box 2002, Allen TX 75013; 888-experianTrans Union, PO Box 1000, Chester PA 19022; 800-916-8800
Getting a credit card shouldn't be too hard. On most campuses credit card companies are aggressively going after students. If he doesn't have a regular source of income he may need his parents to co-sign on the account.
David should recognize that a credit card is a dangerous tool. Less than 50% of all credit card accounts held by students are paid off each month. It's very easy to charge a few things during the month only to find that you don't have enough money to pay the bill when it comes. According to Nellie Mae the average college undergraduate carried a balance of over $2,700 in 2000. That's a lot of debt if you have limited income. If David feels he can't use credit responsibly, he would be wise to wait.
When he does get a card, David should leave it at home. The only time he needs it is when he has planned to make a specific purchase and he knows that he has the money to pay for it. Carrying the card with him is an invitation to make impulse purchases. Very few students can resist that temptation for long.
In fact, he might do better with a store credit card. The reason is simple. It's hard to buy pizza or movie tickets on a Sears' card.
Given what's known about college students and credit, David would be wise to move cautiously. He needs to recognize that most students are not 'building credit'. Instead they're damaging their credit worthiness and digging a financial hole that will make it hard to rent apartments and buy cars when they graduate. Hardly a smooth road to adulthood.
Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website
www.stretcher.com/save.htm
Permission granted for use on DrLaura.com
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A Cheap Used Car
The Dollar Stretcher
by Gary Foreman
gary@stretcher.com
Dear Gary,
I'm a struggling, hard-working single mother who is in dire need of a car, but I can't stand the thought of making car payments for 5 years because of my bad credit. I have $3,000 saved and I'm considering going to an auto auction. If this is not a feasible way to get a car, could you please tell me the best way to get one?
Julie
Julie is wise to avoid car payments. Paying interest on a car loan only jacks up the price of the car. And, while Julie should be able to find an acceptable car in her price range, an auction might not be the best place to look.
She probably already knows that any car in this price range will have some defects. The trick is avoiding major repairs. She would be wise to ask a mechanic or knowledgeable friend to look over any car before she buys it. Most major failures do not happen suddenly. There are warning signs.
Watch out for cars that have been 'totalled' or flooded and rebuilt. Many are recycled to unsuspecting consumers. Julie might want to visit carfax.com. For a small fee she can check a car's VIN number for accidents and other problems.
Always make sure that you get a good, clean title with your car. If a seller cannot produce the title at the time of sale don't buy the car.
Unless Julie is in desperate shape she should take her time. There will be many junkers within her price range. It takes time to find the good rides.
Julie can expect to spend some money on repairs each year. But that's not an argument for a new car. Payments would be more expensive than repair bills.
Should Julie begin her search at an auction? There are some good buys to be had. But there are also big risks.
The best deals are at wholesale auctions. Julie will need a someone who has a dealers' license to get her in.
If you want to try an auction, plan on getting there early. Examine your potential purchase carefully. Take a Kelley's Blue Book or NADA guide with you to help with pricing info. Then hope that no one else bids on your favorite car.
Auctions bring some risks. Cars are sold 'as is'. So if it doesn't run that's just too bad. Generally you be unable to get out of an auction purchase unless the title is defective.
So you need to carefully examine any car that you bid on. And you must do it at the auction site. You can't take the car down to your favorite mechanic for an an unbiased opinion.
The vast majority of auction sellers are honest people that you'd be happy to do business with. But auctions are an easy place for the dishonest to move a car with a bad history. It's hard to judge a seller's honesty when you don't even meet them.
Finally, Julie should remember that auctions have something called a "buyer's premium". That's a commission that's added to the winning bid. Sometimes it's a fixed amount. Other times it's a percentage of the winning bid.
Perhaps a safer option for Julie would be to buy from a private party. It's takes more time, but could get her a better car. Remember her goal: a well maintained car.
Where can she find one? Naturally she can look in the local paper. But, Julie's best bet is to tell friends and co-workers that she's looking for a car.
A well maintained car won't get much more as a trade-in for the seller. So they'd actually do a little better by selling to Julie. She'd have the advantage of knowing more about the seller. And she'd have enough time to have her mechanic look at the car.
What can Julie expect to find? We went to KelleyBlueBook.com for pricing. We priced three popular family models. All three cars were assumed to have 100,000 miles. And all three were 4 door sedans with automatic transmissions, air conditioning and the standard engine. A twelve year old Toyota Camry and eight year old Ford Taurus were under Julie's $3,000 limit. A twelve year old Honda Accord was slightly over.
So it is possible for Julie to find the bargain that she's looking for. She'll need some patience. A good mechanic or friend who knows cars will be helpful. Hopefully Julie will find a dependable set of wheels for her family.
Gary Foreman
is a former purchasing manager who currently publishes The Dollar Stretcher website
www.stretcher.com/save.htm
where you'll find hundreds of free articles to save you time and money.
Permission granted for use on DrLaura.com.
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Bi-Weekly Mortgage
The Dollar Stretcher
by Gary Foreman
gary@stretcher.com
Dear Dollar Stretcher,
I just received something in the mail saying that if you breakup your mortgage payments into twice monthly payments thatit helps you pay off the loan faster. So instead of payingour $2,000 per month payment, we would pay $1,000 twice a monthand end up cutting 7-9 years off our mortgage. I know better than to pay someone $200 to set up something that I can do on my own, but I was wondering if what they said was true? Any advice?
Pam
Pam has an opportunity to save thousands of dollars. But, she's also recognized that she can waste some money here, too.
Let's start with a couple of facts to help understand the issue. The first thing to recognize is that a lot of your mortgage payment doesn't reduce the amount that you owe. All it does is pay the interest that you're being charged each month. That's especially true in the early years of a mortgage.
For instance, at current rates (6.75%) you will make payments for a full year to reduce the amount you owe by 1%. So in one year Pam will have paid $24,00 and still owe 99% of the principal amount.
Paying twice a month will only do a little to reduce Pam's mortgage. The idea is that making a half payment midway through the month will reduce the amount of interest owed. And with less interest owed, more of your payment will go to reducing principal each month.
There are two problems with this approach. First, you're not really doing much to reduce the principal or the amount of interest that you owe each month. Second, many mortgage companies will just credit any early payment to the next payment that you owe and not even give you credit for being early. In that case there's no financial gain.
Paying twice a month will not reduce Pam's mortgage by 7 years. It would only reduce the term of the loan by a matter of months. But there is a way that Pam can get this strategy to work for her.
Instead of paying twice a month, some people adjust their schedule to pay half of their regular mortgage payment every two weeks. That may be what the company is proposing to Pam.
It doesn't seem like much, but at the end of the year you would have made 26 half-payments or 13 full payments. And that's one additional full payment each year.
That one additional payment will reduce the loan term by five and a half years. So the strategy can work. But it's not necessary to pay someone to achieve this result.
All Pam needs to do is to add a little extra to her payment each month. In fact if she can add just 1/12th to each payment, a 30 year mortgage will be paid off 6 years early. All Pam needs to do is to add $166 to her $2,000 a month payment.
Prepayments will reduce the length of your mortgage dramatically. Especially if you make them in the first few years of the mortgage. That's why 15 year mortgages are popular. A relatively small increase in monthly payment can build a lot of equity in your home.
And there's no requirement that Pam prepay every month. Even if she misses many months, any prepayment that she has already made will still reduce the length of her loan.
What's the advantage of a service to handle prepayments? They track two things for customers. First, they verify that the mortgage company applied your prepayment to reducing principal. They also provide current information about your mortgage balance.
Both of those tasks are important. Mortgage companies make mistakes. And in this case any mistake works to their advantage. It's easy for them to take your prepayment and apply it to your next monthly payment. That would eliminate the benefit to you.
Pam doesn't need a tracking company if she's willing to do a little bit of work. Begin by checking with your mortgage company to make sure that prepayment of principal is allowed. In almost all cases it is, but she needs to make sure. Also find out if you need to do anything special when you send it in.
Second, send any extra payment with a clear notation that the extra is to be applied "to principal reduction". Finally, check your mortgage balance after each prepayment to make sure that it was applied properly to reducing principal. A simple phone call should handle it.
Pam has an excellent opportunity to reduce the long term cost of her home. This is definitely a case where a little sacrifice now can pay big dividends later. Although it's hard to imagine being without a mortgage payment, if you plan on owning your own home for 15 to 20 years, it's a goal than can be reached.
Gary Foreman
is a former purchasing manager who currently edits The Dollar Stretcher website
www.stretcher.com/save.htm
Permission granted for use on DrLaura.com
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Mutual Fund Expenses Explained
by Gary Foreman
gary@stretcher.com
Is your mutual fund management company getting rich whileyou're not? You know that they make money by managing some ofyours. But are they charging you too much? How can you tell?Let's answer some of the most common questions about mutualfund expenses.
What are operating expenses? They'll include the payrollfor investment analysts, phone bills, rents for office spaceand the cost of printing and mailing your statements.Basically, it's the cost of managing your money. One notableexception is the commission that the fund pays to buy and sellsecurities. That's not included under operating expenses. It'sconsidered a 'transaction expense' in most cases.
How do you calculate expense ratio for a specific fund?The math is pretty simple. Just take the operating expenses anddivide them by the average assets. Both figures will beavailable in the prospectus or quarterly report. For instance, afund with $10 million in assets and expenses of $100,000 wouldhave an expense ratio of 1.0%.
How much is a 'reasonable' amount to pay for fundexpenses? That depends on two things. First, how hard is it tomanage the money and, secondly, how aggressive your managersare. Let's take two simple examples. First, consider a fund thatbuys US Treasury bonds and plans to hold them to maturity.There's not much research required so the expenses should below. In 1996 the average expense for a government bond fund was1.02%.
Compare that to managing a long-term growth stock fund.You'll want your analyst to do a good job in finding the nextMicrosoft. That takes time and effort. And the average cost ofmanaging a growth fund was 1.42% in '96. As you would expect,the cost to manage international funds or find small emergingcompanies is even greater.
Can higher expenses 'buy' better managers? Sometimes.The most talented managers should make more. What you reallywant to know is if the extra expense is worth it. The best wayto see if a fund really deserved a higher expense ratio is tosee how they've performed in direct comparison to other fundsand the market. If they've done a better job on a regular basis,the higher expenses shouldn't bother you. Conversely, if theyhaven't outperformed, find another fund.
How am I charged with the expenses? Is it on my quarterlystatement? Unfortunately, you'll have to do a little bit ofdigging to find out how much of your money the fund spent. It'snot found on your statement. You'll need to go to the fund'sincome statement in the quarterly report to find the answer.Most people toss the report without looking at it.
A number of industry 'watchdogs' are pushing to have fundexpenses shown on your fund statement. They argue that ifpeople knew how much they were spending on expenses there wouldbe more pressure to control the cost. Fund managers counterthat the increased cost of collecting and reporting thatinformation would only increase the expenses.
How do expenses affect my earnings? They're subtractedbefore you see your earnings. If a fund earns 10% and theexpenses are 1.2%, you'll see a return of 8.8% (10.0 minus 1.2equals 8.8). That's not so bad when markets are going up, butremember that the expenses go on even if a fund is losingmoney. A half-percent difference in expenses can seem huge ifyour fund is only making a couple of percent.
Are 'big funds' less expensive than smaller ones? Yes,but not by as much as you'd think. Obviously, it doesn't costtwice as much to manage a fund that's twice as big. But youneed to remember that the mutual fund companies want to make aprofit, too. All of the savings of a big fund don't come backto you. Some of that savings goes to the fund company asadditional profits.
What should I look for when I consider fund expenses?Look for two things. First, how does the fund's expense ratiocompare to other similar funds? If it's higher, check to seeif it's justified by performance. Don't forget to make surethat the manager that produced the past performance is stillmanaging the fund.
Second, if the fund is part of a family, take a look atthe average family expenses, especially if you're buying a loador 12b-1 fund. You may want to switch to a different fundwithin the family some day. That could be less attractive ifthe whole family has higher expense ratios than the average.And there's quite a bit of difference in average familyexpenses. Some have a ratio of less than 3/4 of a percent andmany others are over 1.5%.
One final thought. You do need to keep all this inperspective. In some ways it's the same as deciding to orderpizza. How much time and money would it take you to make thepizza? Is it a good value? Unless you're really into trackingand researching stocks, you may be getting a pretty good dealfor your one percent or so. That doesn't mean that youshouldn't consider expenses in picking funds; just rememberthat it's only part of the equation.
Gary Foreman
is a former Certified Financial Planner who currents publishes The Dollar Stretcher website
http://www.stretcher.com/save.htm.
Permission granted for use on DrLaura.com
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Nearly Retired
The Dollar Stretcher
By Gary Foreman
Gary@stretcher.com
Help!I am 50 with no savings!! How can I start? Need any and all advice.
Thanks,
Dinah
Dinah sure has a lot of company. Recent Congressional research showed that only 40% of workers have a plan in place for retirement. Even among those over age 55, only 47% had retirement accounts. And the median value of the account was less than $25,000. So a lot of people need to begin saving for retirement.
The first step for Dinah is to try to get an idea of how much money she'll need. If she's among the two thirds of Americans who expect to continue in her current lifestyle after retirement, she can expect to need about 80% of her preretirement income. That's a surprise to many people.
Where will she find that much money? Dinah should begin by finding out about any existing plans she may have through past or present employers. Even if she doesn't have any private company pension, she'll be eligible for social security. To find out how much she'll receive call the Social Security Administration at 800-998-7542. Ask for the Personal Earnings and Benefit Estimate Statement.
Once Dinah has some idea of how much income she'll need and what's already available she can calculate how much additional she'll need to provide. For illustration, let's assume that she'll need an extra $10,000 in income each year.
How much will she need to save to get that income? We could go through a lot of discussion and complicated formulas. Whole books have been written on just this subject. But for our purposes, I'd assume that Dinah should be able to safely get about 7% in income from her savings each year. That's a realistic, conservative long-term rate.
To find out how much savings will be required to generate the income, just divide the income desired ($10,000) by the rate of return (7% or 0.07). In this case Dinah would need about $143,000 to produce $10,000 in income each year after retirement if it earned 7%.
So how does Dinah begin to save that much money? Much of what she'll need to do is the same as if she were beginning any saving program.
Begin by setting some goals for her savings. Can Dinah manage to save $5 each week? Begin with something simple. She might not know where to find an extra $5. She'll need to take a look at her habits and see what she can change that will make $5 available each week. It will almost certainly require her to change some habits.
Start today. Even if she can only save 50 cents this week, that's better than nothing. And if she does the same or better next week a new habit will be starting. Sure, more is better. But actually saving 50 cents is better than complaining that you can't save $5.
Once Dinah begins to save some money she'll need to decide where to keep it. Here the goals are safety and growth.
Begin with a separate saving account. Once Dinah has put money into the account it should stay there unless she's moving it to an investment account that's earmarked for her retirement.
After she has accumlated some money in the savings account she should periodically move some of it to a no-load, growth mutual fund. There are a number of excellent ones available. Historically a fund of this type will earn nearly 10% per year over the long haul.
Dinah should contribute to a tax deferred retirement plan. If she is eligible for a 401k plan she should sign up. Also begin contributing to an IRA. Her money will grow much faster if she doesn't have to pay taxes on the earnings each year.
Dinah should learn some of the investment basics. Your potential risks and rewards differ with various investment choices. Learn the differences and which would work best for you. It's really not that complicated. The important investment concepts are easy enough to understand. There are local adult ed classes, online courses and even books that can explain the basics.
Dinah is smart to get started now. Yes, earlier would have been better. She might have started too late to guarantee a comfortable retirement. But she can still make a significant difference in her future standard of living.
Gary Foreman
is a former Certified Financial Planner who currents edits The Dollar Stretcher website
www.stretcher.com/save.htm
Permission granted for use on DrLaura.com
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Refinancing and Your Credit Score
The Dollar Stretcher
by Gary Foreman
www.stretcher.com
gary@stretcher.com
I purchased a 1999 Buick Regal right before Thanksgiving. The loan was for a 14.5% interest rate. I was told that I should wait at least one year before refinancing. If I did otherwise it would look bad in my credit for not staying with this company for at least a year. I am interested in shopping around to see if I can get a lower interest rate, but am uncertain due to the information that was given. Should I shop around or wait until a year has been completed?
Lillian
Like many of us, Lillian is concerned with her credit score. And, she should be. Not only will her credit score affect how much she'll pay to borrow money, in some cases it can make getting credit difficult or impossible.
Before we look at Lillian's question, we need to learn a little more about credit scores. The largest supplier of credit scores is Fair, Isaac Co (FICO). The score is designed to give potential lenders an idea of how likely you are to repay a loan. FICO has demonstrated that a lower score does correlate to a greater probability of default.
FICO scores range from 400 to 900. About 700 is considered average. The exact formula used is a FICO secret. But they do provide an idea of what things go into the formula and how much weight each category is given. That should be enough to help Lillian with her question.
The advice given to Lillian is true, but probably not as important as she was led to believe. The longevity of her accounts only makes up 15% of her credit score. And that's for all of Lillian's accounts.
The score will include the oldest account she has and also the average of all accounts. So closing one account early by refinancing really shouldn't make a big difference in her score. Her average will dip slightly, but unless her score is 620 or below that shouldn't pose a problem.
The biggest determinant of Lillian's score concerns how good she's been about paying her bills on time. 35% of her score reflects her promptness in bill paying.
The amount that Lillian owes will determine 30% of her credit score. Naturally potential lenders feel more comfortable if she owes less money. Accounts that are close to their limit will lower her score.
Ten percent of the rating is based on Lillian's pattern of credit use. The 'pattern' considers how many of her accounts are fairly new and how many potential creditors have asked for her history. People with debt problems often try the same tactics. The FICO formula attempts to identify those people.
The final ten percent evaluates the types of credit that Lillian is using. The types of accounts, mix of accounts and total number of accounts she has are included. Loans with finance companies will reduce her score.
More than one company provides credit scores to potential lenders. Your score will not be the same with each provider. We've used the formula from FICO for this discussion. Other formulas are similar.
Now back to Lillian's question. She didn't mention who told her to wait. It is possible that the person who gave that advice stood to make more money if she delayed.
So what should Lillian do? The first thing is to get a copy of her credit score. Next she should check and make sure that the information is accurate. Studies indicate that about one in four reports contain serious errors. Those errors could reduce Lillian's credit score and increase the amount she'll pay to borrow money. She can obtain her score at
www.myfico.com
.
Unless her score is below 620, she shouldn't have to worry about refinancing now. A healthy credit score won't drop much for one account. And any drop wouldn't affect this refinancing. If Lillian manages her credit properly it won't be important the next time she goes to borrow money either.
Once she's verified that the information is accurate, she should begin to look for lower cost financing. Identify two or three potential lenders. She'll want to contact them one right after the other. Each lender will obtain her credit score. If all those requests happen over a few days they'll be treated as one event. If they trickle in over months, they'll tend to decrease her score.
It is possible that she won't find cheaper financing. But the only way she'll know that is if she checks some competing lenders.
Gary Foreman is a former financial planner who currently edits The Dollar Stretcher website:
www.stretcher.com
where you'll find hundreds of time and money saving ideas. Permission granted for use on DrLaura.com.
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Comparing a Refinance
The Dollar Stretcher
By Gary Foreman
Gary@stretcher.com
Dear Gary,
My husband and I want to refinance our mortgage and add a credit card debt. We owe $44,000 on our mortgage at a rate of 7 1/8% and we have 11 years left. We want to add a credit card debt of $17,000 at a rate of 9.99%. The best mortgage rate that I have been able to find is a 15 year fixed at 6.25% with a fee of $1161 and no points. Would we be wise to refinance? Thanks. I hope you can help me with the answer or point me in the right direction.
Lynn O.
You don't need to be refinancing your home to ask this question. We face the same problem with competing credit card or auto financing offers. And many of us have a similar reaction. There's just too many numbers to even know where to start. So we end up with something that could be costing us extra money every month.
Let's break Lynn's question down into bite sized pieces and see if we can't simplify things. We'll look at a method that you can use to compare any two loans.
First we'll figure out what Lynn is paying in interest each month on her current mortgage and credit card balance. Then we'll calculate what the new loan would cost her in interest. Then we'll compare the two and see how long it would take to recover the fee.
Begin with the existing mortgage. Lynn has a $44,000 mortgage at 7.12%. We'll do a monthly comparison. If we take the annual interest rate (7.12%) and divide it by 12 we'll find out what the rate is each month. It works out to 0.59%. To calculate how many dollars that equals to each month we'll multiply the mortgage principal amount ($44,000) by the percent interest (.59% or .0059). It works out to $260 in interest charges.
Now for Lynn's current credit cards. She has a balance of $17,000 and is paying 9.99% interest. The process is the same as for the mortgage. We're going to take the annual interest and convert it to a monthly rate. In this case that's 0.83%. Then we'll multiply the balance by the rate ($17,000 x 0.0083) to get the monthly interest owed ($141).
So, between the two bills she's paying $401 ($260 + $141) each month in interest payments.
How would a new mortgage stack up? Well, since she wants to add the credit card debt to the existing mortgage, the refinanced mortgage would be $61,000 ($44,000 + $17,000).
Now that we know the principal, let's calculate the monthly interest. Again we'll take the annual rate (6.25%) and divide by 12 to get the monthly rate (0.52%). Then we'll multiply the mortgage balance by the monthly rate ($61,000 x 0.0052) to get our monthly interest amount ($317).
Now we're in a position to compare how much the two loans would cost. The new rate would save her $84 each month in interest ($401 - $317).
But, as Lynn pointed out, there's a fee of $1,161. Is it worth paying that fee to get the monthly savings? If we divide the fee by the monthly savings we'll see that it would take nearly 14 months for Lynn to save enough to recover the fee.
Now I'm sure that those of you who are good with math have probably found a few flaws in our method. The main problem is that all three balances will change a little each month. So to be perfectly accurate we'd need to do a separate calculation for each month. And then adjust our account balances and do it all over again. And again, etc.
But that really shouldn't be necessary. Predicting the future isn't an exact science. So even if our calculations were precise, the future wouldn't be. This method will give Lynn a pretty fair estimate. Certainly good enough to make a decision.
There are other things to consider. Payments may be different than the amount of interest owed. The new interest owed each month is like money that Lynn has spent. In this case she bought some borrowed money. Her payment would typically be the amount of new interest plus some of the principal amount owed. She doesn't want to confuse the two and sign up for a payment that she can't afford.
Also, rolling credit card debts into your home mortgage isn't always a good idea. There can be a temptation when you see an account balance of zero. Many people will run up the balance again. And that would defeat the purpose of putting the credit card balance in with the mortgage.
From this point Lynn should be able to compare the two choices and make a reasonable decision for her family. We hope it's a good one for her family.
Gary Foreman
is a former Certified Financial Planner who currently edits The Dollar Stretcher website
www.stretcher.com/save.htm
. You'll find hundreds of free articles to stretch your day and your budget. Permission granted for use on DrLaura.com
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Trouble Getting Mortgage
The Dollar Stretcher
by Gary Foreman
gary@stretcher.com
Dear Dollar Stretcher,
Several years ago I was told that I would have to file for bankruptcy. I did see an attorney and he suggested I wait until after I got divorced. I told my creditors that I was planning to file for bankruptcy after my divorce. I was not happy with the attorney during my divorce and never filed for bankruptcy. It has been almost five years now and my debt has been written off and no creditors are bothering me. I'm trying to get my life back in order but I'm still struggling. I need a place to live. With rents so high I could pay a mortgage on a small condo for the same amount. This is what I would like to do but I have the debt issues hanging over my head. I'm a 46 year old single parent raising two elementary school age children. I feel like I'm going to end up living my old age in a cardboard box. I also feel like my life is in limbo and there's no way out. Can you offer any advice?
Sally
It sure would be nice to tell Sally that there's an easy solution for her problem. But unless she has a wealthy friend or relative willing to step in she'll need to have patience, expend some effort and be willing to make some hard decisions.
Only time will clear Sally's credit history. Generally negative information will remain on your report for seven years. Or 10 years for a bankruptcy. There's no legitimate way to erase truthful information quickly from her history. Being careful to meet her current payments will help improve her score over time.
But, Sally may still be able to get a mortgage if her credit score is in the low 600 point range. She can expect to pay a higher interest rate. A sizeable down payment will make finding a mortgage easier. In Sally's case that might not be possible. The only way to find a mortgage company willing to work with her is to search for them. That means making phone calls and telling her story.
Sally needs to be careful in applying for a mortgage. If a large number of potential lenders check her credit history that will make it look like no one is willing to lend her money. She can avoid that problem by explaining her situation before they check her history. Some will turn her down right away. They would have refused her anyway. At least now they haven't lowered her credit score.
One way to find the best potential lenders is to work with a mortgage broker. They should be familiar with the institutions that are most likely to work with Sally. Again, she needs to be up front with the broker about her past. Also make sure that he's going to limit access her credit file.
Other options could work for Sally. The first is renting with an option to buy. A landlord/seller will still want to know about Sally's finances. But, typically they won't be quite as critical as a regular mortgage company. It would also allow her to continue to rent while she's trying to find a mortgage.
Another option would be to find a condo being sold by someone who's willing to take back the mortgage. Sally is right about condo prices. In many places condos are relatively inexpensive. That also means that she's more likely to find a seller who has had trouble selling. It might be enough to get one to finance the deal for Sally.
One other possibility would be to see if there are any assistance programs that could help her. Habitat for Humanity is one. There are others. Most are run locally so she'll need to speak with her community social service agencies and churches to find them.
Just finding a home and qualifying for the mortgage isn't the only thing that Sally needs to watch. She must be careful to only spend what she can afford.
Between food, auto, medical and insurance Sally will probably have close to 50% of her after-tax income committed. So if she spends an additional 30% on housing that only leaves 20% for clothing, entertainment, savings, debt reduction, after-school programs, unexpected emergencies and savings.
Others may tell Sally that she can afford to spend more. She should ignore them. They won't be the ones sweating the mortgage payment each month.
There are ways for Sally to reduce her housing costs. One would be to share a house or a larger apartment. In many places it's difficult to provide for a family on one income. It's harder still if there's only one parent because they're too busy to do some of the time consuming things that can save money.
Taking in a roommate could help solve that problem. Two single moms could blend a family and both would be better off financially. With two adults to share cooking, cleaning and other household chores Sally would also have a little more time to enjoy her children.
Naturally Sally would need to be very careful in finding the right person. They will influence her children at an impressionable age. So she'll want to know the person well before anyone starts packing and moving their belongings.
Sally's past will make her future more difficult. Hopefully she'll find the right combination to allow her to build some equity and keep her housing expenses in line with her income.
Gary Foreman
is a former Certified Financial Planner who currently edits The Dollar Stretcher website
www.stretcher.com/save.htm
. copyright 2001 Dollar Stretcher, Inc. Printed with permission. All rights reserved.
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Space Heater Efficiency
The Dollar Stretcher
by Gary Foreman
Hi Gary,
Here's a heating question. I'm someone who really likes to be warm. If you can believe it, I grew up in a house that was kept at 75 degrees in the winter. I'm trying to adjust to a cooler house as an adult but it's not easy! Anyway, here's the question. Which is more efficient, using my electric space heater/fan which requires about 1000-1500 watts, or turning up my relatively new, gas-powered, forced air furnace to heat up a good sized two bedroom apartment? I've already done as much insulating as I can. I'd really appreciate it if you could help me figure this out!
Connie
As someone who's lived in Florida for years I can appreciate Connie's desire to keep warm! At the same time it's also important to find ways to do that without watching your energy bills go through the roof. Her inclination is right. As a general rule, if you're only going to be in one room it will be cheaper to heat that single room than the whole apartment. And a space heater is often a good choice.
First, some warnings. Electric space heaters can overload an electrical circuit. Be careful to avoid problems. No matter what type of heater you use remember to take all appropriate safety measures. Proper inspection and use are important. Protect your family from shocks, fires and asphyxiation. Safety should always come first.
Next, let's look at Connie's comparison. Unfortunately, getting an exact answer isn't easy.
To figure out the cost of operating a space heater you need to multiply the kilowatts used per hour times the cost per kilowatt hour for electricity. Multiply that by the length of time that the heater is actually on. You can get the kilowatt hours by dividing the wattage by 1,000. Your electric bill should show you how much you pay per kilowatt hour.
Electric space heaters do not lose any energy through ducts or combustion. So they're considered to be 100% efficient. All of the warmth generated by the space heater will radiate into the room.
Here's where it gets more difficult. To know how much it costs to operate her gas furnace she'd need to know how energy efficient the furnace is. Most convert between 55 and 85% of the gas used into actual heat. She'd also need to know the furnace's rate of fuel consumption and the cost of fuel in her area.
If that wasn't enough Connie would also need to account for the loss of heat in her ducts. Depending on the insulation and condition of the ducts she could be losing a major portion of the heat generated by the furnace before it gets to the rooms.
Finally, she'd need to convert both the space and central heaters to a common measure of heat. The most likely candidate is BTUs. And, there's no easy way to do that for either of the two heaters.
But that doesn't mean that some comparisons can't be drawn. The U.S. Dept. of Energy estimated that an average conventional gas system cost 43% as much as a space heater when heating a whole house. So on average the gas central system is more efficient.
No, she shouldn't throw out the space heater. Let's keep it in perspective. It still makes sense for Connie to use the space heaters to boost the temperature in one or two rooms of her home. And not knowing the exact cost shouldn't keep her from getting the most heat for her dollar. Her strategy is fairly simple.
Her first step should be to lower the thermostat for the central gas system to the lowest comfortable level. If she's only using one or two rooms, she should lower it some more and use space heaters to warm up the room she's using.
Connie can also manage something called her 'thermal comfort'. What's that? In it's simplest form it means that the coldest part of your body will determine how cold you feel. Proper management of thermal comfort could allow her to lower the thermostat by 8 degrees without feeling any colder. And that could save 15% of her heating bill.
So Connie will want to eliminate drafts and places where her skin is exposed to the cold. It turns out that Mom was right. You should wear warm stocks and a turtle neck sweater in winter!
Connie has already taken steps to add insulation. Another possibility is to add weather-stripping. In many homes if you add up all the cracks it's as if a window were left wide open letting out heat all winter long. Not only that, the cold air coming in lowers the thermal comfort.
Connie's well on her way to getting the most for heating dollar this winter. All she needs now is a cup of hot chocolate!
Gary Foreman
is a former Certified Financial Planner who currently edits The Dollar Stretcher website
www.stretcher.com/save.htm
. You'll find hundreds of free articles to stretch your day and your budget. Permission granted for use on DrLaura.com.
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